Investing, Asset Allocation, Economics & the Search for the Bottom Line

Strategic Briefing | 4.30.12 | U.S. Recession Risk

Sluggish U.S. growth continuesJames Hamilton (Econobrowser) | April 27
The slow pace of GDP growth continues to disappoint, particularly for the 12.7 million Americans actively looking for jobs and still unable to find them. On the other hand, the U.S. is unquestionably better off than would be the case had the September prediction of the Economic Cycle Research Institute that the U.S. was about to enter another recession proved to be accurate. The latest GDP report brings our Econbrowser Recession Indicator Index down to 4.0%. For purposes of calculating this number, we allow one quarter for data revision and trend recognition, so the latest value, although it uses today’s released GDP numbers, is actually an assessment of where the economy was as of the end of the last quarter of 2011. The index would have to rise above 67% before our algorithm would declare that the U.S. had entered a new recession.

May 2012 Economic Forecast: Continued Expansion PredictedGlobal Economic Intersection | April 30
The Econintersect May 2012 economic index shows underlying economic fundamentals continue to show economic expansion – and the dip in the rate of growth rebounded somewhat in this forecast…. Recession markers of real GDP, real income, employment, industrial production, and wholesale-retail sales growth remain well away from recession territory.Chicago Fed: Economic Activity Decreased in MarchDoug Short (dshort.com) | April 26
With the exception of the 1973-75 recession, the -0.7 level has coincided fairly closely with recession boundaries. The 1973-75 event was perhaps an outlier because of the rapid rise of inflation following the 1973 Oil Embargo. Otherwise a cross below the -0.7 level has synchronized within a month or two of a recession start. A cross above the level has lagged recession ends by 2-4 months.Growth outlook undeterred by March payroll reportMike Dueker’s Business Cycle Index (Russell Investments) | April 13
The Business Cycle Index (BCI) and forecasts of it were little changed following the March 2012 nonfarm payroll employment report, even though it is an important component of the BCI and the 120,000 gain in employment was well below consensus forecasts of a little more than 200,000 jobs. The reason is that the BCI model’s forecast of March payroll employment from the previous month was only 137,000 jobs, so there was little impetus to revise the BCI model outlook. Current reading and trend: The BCI is now expected to remain over 1.0 standard deviations above zero until June 2014, which represents a decent run of solid economic conditions. Financial market indicators in the construction of the BCI are at values that neither add nor subtract significantly to/from the business cycle outlook.ECRI Weekly Leading Indicator: The Growth Index Slips AgainDoug Short (dshort.com) | April 27
Triggered by another ECRI commentary, Why Our Recession Call Stands, I’m now focusing initially on the year-over-year growth of the WLI rather than ECRI’s previously favored, and rather arcane, method of calculating the WLI growth series from the underlying WLI (see the endnote below). Specifically the chart immediately below is the year-over-year change in the 4-week moving average of the WLI. The red dots highlight the YoY value for the month when recessions began….the WLI YoY is currently at a lower level than at the starting month for five of the seven recessions during the published series. Of course, the same can be said for its interim YoY trough in 2010. In any case, the behavior of this indicator over the next quarter or so will be especially interesting to watch.